Stocks move could lead to cash exodus

Stocks on the Hang Seng Index could lose billions of dollars in investments if an influential index compiler goes ahead with plans to change the way it ranks shares.

Morgan Stanley Capital International (MSCI) is expected to make an announcement next month. It appears likely to follow its competitors and adjust its indices to reflect the number of shares freely traded - those not in the hands of major shareholders. Britain's FTSE International and the US-based Dow Jones are among the global index compilers that have already done so.

Benchmark indices play a major role in deciding where the world's fund managers invest their money. Hong Kong's stock market - as well as its status as a world-class bourse - could suffer if such a system were instituted by MSCI.

Calculated this way, Sun Hung Kai Properties, for instance, could only be weighted based on 54 per cent of its value. That is because only 54 per cent of its share capital circulates freely, with the rest locked up in the hands of major shareholders the Kwok family. Thus fund managers tracking the company through MSCI's benchmarks could potentially sell off nearly half of their holdings. Sun Hung Kai is a typical example. On average, major shareholders control about half of shares in the blue chips.

As an estimated US$30 billion (HK$233 billion) to US$40 billion tracks MSCI's Hong Kong constituents, a strict interpretation of free-float could see up to US$20 billion moved out of the SAR by the company's clients. However, because of the impact on Hong Kong and other Asian markets - Singapore's average free-float is 40 per cent - any such move would probably be gradual.

'Hong Kong's average free-float is about 50 per cent whereas in the US it's over 90 per cent, so you could see the impact on country weightings. So we're not going to rush into any rash decision,' said MSCI executive director John Fildes.